When NatWest decided to make a big push into investment banking in the mid-90s, the boardroom executives received something of a shock. Top bosses were asked to sign off pay packages that included Porsches - a luxury beyond the dreams of even the bank's most successful branch manager, or even themselves.

The following year the board was told a Porsche was no longer enough. Only a Ferrari would do.

It was a painful leap into the culture and practices of investment banking that jarred with the relative simplicity of a high-street bank. NatWest paid £70m in golden handcuffs to stop 40 star players leaving the investment banking boutique Hambro Magan it bought in 1996 - sums difficult to explain to staff working behind counters in branches where 10,000 jobs were under threat.

The investment banking ambition ultimately led to the downfall of NatWest, which was bought by Royal Bank of Scotland in 2000. RBS has since been bailed out by the government and the taxpayer owns about 58% of the bank.

NatWest's experience helped to lift the lid on the culture of the City bonus. Big pay packets are supplemented by even bigger bonuses at the end of each year. In the coming days, bankers at Goldman Sachs and Morgan Stanley will be among the first in the City to learn about their bonuses for 2008 - arguably the most tumultuous year the financial markets have ever witnessed.

While Goldman's seven most senior executives have pledged not to take any of the firm's traditional Christmas payouts, the firm is still expecting to distribute bonuses to its best performers below board level.

According to the recruitment firm Armstrong International, three-quarters of City bankers can expect a bonus this year - albeit one that is 50% to 70% below last year's level. A quarter will get no payout and Armstrong expects bonuses to be eroded further next year.

The fact that bonuses are being paid at all after such a torrid year could come as a surprise. But the culture of the bonus is so ingrained in the City that any firm taking a decision not to award the payout - as HSBC did six years ago - fears it will lose its best staff to rivals.

The partnerships that dominated the Square Mile until the "Big Bang" in 1986 - which opened London's doors to brash, ambitious Wall Street firms - were all based on a bonus culture.

In the old-style partnerships there were no salaries, instead at the end of the year, the profits were shared out among the partners.

Michael Marks, a veteran financier who made his name at the brokers Smith New Court, said: "I don't think there's anything wrong with the bonus culture. What went wrong was the way the US investment banks implemented it."

Marks, who now runs the financial firm NewSmith Capital, sold Smith New Court to Merrill Lynch in 1995. He is concerned about the way that bonuses are paid to traders for taking bets that might backfire in years to come.

He argues that if a banker is paid a bonus of, for example, 10% to 15% of a fee booked for advice given on a takeover or merger, then that is the firm's prerogative. "I don't have a problem with that. There is no liability on the banks," said Marks.

"What I've really got a problem with is that you pay bankers who structure products ... when the liability stretches out two to five years." The result is that the "shareholders are left to pick up the pieces" when the positions unravels - as indeed has happened in the past year when intricate financial products based on mortgages have collapsed because of the US sub- prime crisis.

"Is it greed? I suppose to a degree it is. I would not have booked profits if I'd been an investment bank until the end of the product," said Marks.

The financial crisis has pushed the bonus culture to the top of policymakers' agenda. The Financial Services Authority has written to the chief executives of major firms to urge them to review pay policies to ensure they take account of the risks being run by traders. Hector Sants, chief executive of the FSA, said he wanted financial firms to make sure pay deals were "consistent with sound risk-management".

There are signs that the FSA's calls are already being heeded. The Swiss bank UBS, Europe's biggest casualty of the sub-prime mortgage crisis, is leading the way by devising a system that withholds part of a bonus - through a self-styled "bonus-malus" system - for up to four years. The subtle shift in the structure of the pay deals could yet help the bonus culture survive the economic crisis.